Guest invites getting blocked for example.com email

I was trying to figure out the permissions required to do guest invites with sample flows. I created an application credential with User.Invite.All , and with this when i tried creating a guest invite for guest@example.com. It kept failing saying
Guest invitations not allowed for your company. Contact your company administrator for more details.

AI agents kept suggesting that i looking into external collaboration settings, which was already set to Only users assigned to specific admin roles can invite guest users. I had it changed to Member users and users assigned to specific admin roles can invite guest users. But it still didn't work.

But when i changed the email to ******@xyzabcdefghi.com it suddenly starts working. I checked if the account has any domain whitelist, and it doesn't have any ( otherwise the above email wouldn't work anyway ). Is this deliberate ? I don't see this documented anywhere.